Uncle Sam's FICO Score

If the US Government were applying for a loan, what would its credit score be? ConvergEx's Nick Colas estimates it at 655 (based on www.myfico.com) - which is higher than we suspected - but consistent with the structural belief in both sovereign and personal debt rating systems that historical payment patterns matter more than ability to pay, leverage, or loan amounts.

Via ConvergEx's Nick Colas:

If the U.S. Government were applying for a loan, what do you think its credit score would be? Let’s plug some data into the “Free Credit Score Estimator” on www.myfico.com (the consumer outreach site for Fair Isaac, one of the three major providers of personal credit scores in the United States). There are 10 questions to the survey, which I will summarize here, along with the answers I plugged in:

How many credit cards do you have? I answered “5 or more” on behalf of Uncle Sam, the largest number offered in the survey. The follow up question is “How long ago did you get your first credit card? I entered “More than 20 years ago,” the longest time frame choice offered.

How long ago did you get your first loan? The answer that seems to best fit is “More than 20 years ago.” Pretty much the same as the prior point – the U.S. has been a net borrower for a long time indeed.

How many loans or credit cards have you applied for in the past year? Trick question, this, I think. I was conservative and answered “6 or more” since government bond auctions are pretty regular affairs.

How recently have you opened a new loan or credit card? I entered “More than 6 months ago.” The last increase to the Federal Debt Limit was in January, to the current $16.4 trillion.

How many of your loans and credit cards currently have a balance? Bit of a tough one, this. Technically, the U.S. government has one massive credit card – the ultimate Black Card, really. But if you parse this out among the various buyers of U.S. sovereign debt, the more honest answer is “9 or more,” which is what I entered.

How many of your loans and/or credit cards have a balance? “9 or more” as well here.

Besides any mortgage loans, what are your total balances on all other loans and credit cards combined? The highest amount you can choose is $20,000. I checked the box there.

When did you last miss a loan or credit card payment? Thankfully, the U.S. can enter “I have never missed a payment.”

How many of your loans and/or credit cards are past due? Again, thankfully, “0” is the answer.

What percent of your total credit card limits do your credit card balances represent? As of September 28th, the U.S. Government had borrowed $16, 027 billion on its Statutory Debt Limit of $16, 394, or 97.8%. I check the “90-99%” box.

Please indicate if you have ever gone through any of the following negative financial events in the last 10 years: bankruptcy, tax lien, foreclosure, repossession, or account referred to a collection agency. Toss up call – I check “No.”

According to FICO based on these answers, Uncle Sam’s score is 630 – 680. And, apparently, America should buy Suze Orman’s FICO Kit Platinum for $49.95, an offer for which appears prominently just below our hypothetic result. Can’t hurt, I suppose…

Ironically, the average FICO score for a U.S. consumer is 690 – pretty much spot-on with the back of the envelope assessment of the nation’s finances. It’s not a great score, truth be told, since half of all U.S.-based borrowers have better. But if America were shopping for a new car or looking to get into a larger house, chances are pretty good it could get a mortgage or a car note. If you’re wondering how this is possible given all the hand-wringing about the state of the economy and continued increases in borrowings, consider the following:

Half of a FICO score comes from an assessment of your payment history and the length of your overall credit history. If you’ve been borrowing a lot but always pay what’s due, that’s not a problem. But if we plug even one missed payment for 30 days into that FICO score estimator for Uncle Sam, his hypothetical score drops to pretty sad 570 – 620.

Only 30% of a FICO score is driven by the amount of money you owe. In sovereign debt circles – rather than consumer finance – the most common measure is Debt-to-GDP. The U.S. is essentially at 100% if you include the debt issued to Social Security (and I don’t know why you wouldn’t) and well over that number if you add off-balance sheet liabilities. Still, as bad as those numbers get, it’s not a big deal to a FICO score. Or, apparently, to S&P, Moody’s or Fitch. But going through the FICO questionnaire and the underlying math, I see a little better the logic behind this.

The “Types of Credit Used” by a consumer are an even smaller contributor to a FICO score. So the U.S. Treasury’s proclivity for borrowing over short time periods (5 years or less) even though the country has scant chance of paying the debt back over this time horizon isn’t much of a problem.

Of course, in a typical loan application process, Uncle Sam would also have to enter his current income and –most likely – some history of this statistic. The Daily Treasury Statement is essentially the record of the money government takes in (taxes, mostly) and spends (Social Security, Medicare/aid and defense, mostly). You can check out this report here: https://fms.treas.gov/dts/index.html. The simple math is the following:

Total spent: $3,459 billion. Just over a third of this spending is funded with debt (noted in the prior point), and the balance comes from tax and withholding.

So how does someone who earns $63,000/year after taxes and borrows $37,000 to plug the whole in his budget still merit an “Average” credit score? Because, apparently, he has always paid what he owes, promptly and in full.

The Treasury tax and withholding data is also a useful proxy for employment growth, a timely topic given the upcoming Employment Situation Report on Friday. The market is looking for 110-120,000 jobs added in the month, but our data shows that this is probably a stretch. A few points to close out this note:

Total tax and withholding receipts for the month of September 2012 were up just 3.6% versus prior year. If you only look at those payments automatically withheld by employers, that comp moves down to 3.3%. Over time, tax receipts and job growth should track very closely. Average income has been flat for +10 years, after all.

September’s comp is very close to every monthly result for this data back to April, consistent with a sluggish economy and little net employment growth.

The average monthly growth in non-farm payrolls for the last 6 months is 97,000 workers, and that is a fair estimate of what we should expect for September as well. That’s consistent with the tax/withholding data. It’s just not consistent with expectations, which as I noted above sit uncomfortably higher at 110 – 120,000.